A newly elected Prime Minister, rising consumer energy prices and the cost-of-living crisis continue to dominate the news. Read on to see how markets have fared so far this week.
Russia cuts off European gas supply
Russia has indefinitely suspended delivery of natural gas through the Nord Stream 1 pipeline, which supplies Europe and is operated by Russia’s state-owned Gazprom. The company blames ‘maintenance issues’ for the suspension, but many believe it is retaliation against the G7’s decision to impose a price cap on Russian oil to limit the Putin regime’s access to revenue.
European countries’ gas storage facilities are now 80% full. However, this would last only around 80 days at average winter temperatures, raising the possibility that European countries may have to ration energy and reduce production if gas supplies from Russia do not resume.
It is unlikely that consumer gas prices will abate without further multilateral intervention or an end to the war. Although gas occurs naturally in abundance, it is capital intensive to extract and transport, and low investment in the industry has left Europe reliant on Russian gas pipelines. Europe imports 80% of its gas, 45% of which comes from Russia, and alternative supplies via pipelines from Norway, the UK and Africa are already running at full capacity. Europe lacks infrastructure for receiving and storing large amounts of liquefied natural gas (LNG).
In a show of strength, OPEC+ has cut oil production to shore up prices, which fell below $100 per barrel due to weaker demand from China and fears of an impending recession in Europe. The move to cut 100,000 barrels a day (equivalent to 0.1% of daily demand) from October reverses a production increase agreed last month following President Biden’s appeals when visiting Saudi Arabia. OPEC+ includes Russia and also US allies who are reluctant to accept President Biden’s demands.
Victorious Truss faces a daunting inbox
Liz Truss’s election by Conservative Party members as the UK’s new prime minister was widely expected, but her 57% to 43% majority was lower than most pollsters predicted.
The new prime minister will need to hit the ground running to deal with the pressure that energy price increases are placing on households and businesses. The UK’s energy price cap for households is designed to protect consumers by reflecting wholesale gas prices and capping utility companies’ profits at 1.9%. However, the dramatic increase in wholesale prices seen since Russia’s invasion of Ukraine has already caused a 54% rise in energy prices this year, with a further 80% increase to come in October.
Boris Johnson’s administration announced measures to soften this impact but more help will be needed, particularly for the poorest households. There is speculation that Ms Truss might freeze consumer energy bills and provide support for energy companies that will be repaid via higher consumer energy prices over the coming years. If support is also extended to other businesses, the overall cost of the scheme could top £100bn and exceed the cost of the COVID furlough scheme.
Ms Truss has said that her focus will be on boosting economic growth in an attempt to avoid recession. She has promised to reverse income tax increases introduced by the former chancellor and her leadership rival, Rishi Sunak, and to scrap planned increases in corporation tax.
Market review
It was another negative week across all global equity markets, with the MSCI World down over 3% in US dollar terms. In the US, the NASDAQ suffered the largest losses, ending the week down over 4% as the summer bear market rally ended abruptly.
Bond markets declined in response to suggestions that further large interest rate rises may be on the horizon. UK inflation-linked bonds fell more than 7% when news of a possible energy price cap was leaked.
Currency markets saw further strengthening in the US dollar. The euro/US dollar rate fell below parity and the sterling/US dollar rate hit its lowest level since 1985 before ending the week at $1.17.
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